Tax Law: Negotiation of Assessed Amounts Versus Canada Revenue?

The question frequently arises in my tax litigation practice whether or not the Canada Revenue Agency (“CRA”) will negotiate with taxpayers over owed tax debt. In other words, is there some method whereby CRA will accept a reduced amount in lieu of full payment?Can the taxes owed be negotiated with CRA?

Before I begin to answer, the routine is similar, regardless of whether you are dealing with CRA, or whether you are dealing with the revenue authority in my original country of origin — the IRS in the United States. The collections section of both agencies places a premium on the ability of their respective agents to collect as much tax revenue as possible. If either agency perceives that there is the ability to pay the full amount of alleged tax debt, then there may well be only a minimal opportunity to ‘bargain down’ that amount.

Now, despite that, I believe that it is possible to achieve resolution for a reduced amount. Sadly, most taxpayers do not possess the necessary knowledge of both substantive and procedural tax law, nor the established routines of the revenue agency. This is one of those cases where professional tax services, whether from a tax litigation lawyer or otherwise, becomes a legitimate option. If anything, dealing with CRA or IRS is an emotionally stressful time for anyone personally affected, hence perhaps even greater need for a detached, experienced, reputable tax professional.

Of course, one also needs to consider the amount of tax debt owed, and whether or not it is even feasible to hire someone. For instance, if you purportedly owe only a relatively small amount of a few thousand dollars, is it worthwhile to retain the services of a tax professional when such services could cost just as much — if not more than — as the tax debt payoff? Please understand, I believe that there are some lower cost options, as will be discussed, below. However, the taxpayer will need to engage in some quick cost-benefit analysis.

In cases involving greater amounts of tax debt — in some of my previous cases, involving debt in the hundred of thousands or millions of dollars — the priority to engage in legitimate discussion or contest is perhaps a bit easier. Those clients normally possess the funds, combined with the urgent need to push for better resolution of tax debt problems. Those clients normally possess the resources necessary to push action through to even an appeal to tax court. Indeed, negotiation with the Department of Justice may prove more effective than dealing with the CRA’s collection agents. There, the proverbial ‘give and take’ occurs to potentially negotiate down the specific amounts owed.

As I recently read on an accounting blog, a good analogy to the issue we are discussing is a poker game. If the CRA is holding an extraordinary hand, such as a straight flush — often, it feels, is their norm — how do you win if all you have is a pair of deuces, and the CRA knows that you only have a pair of deuces? Theoretically, the CRA does not have any temptation to take less than the entire amount in the ‘pot,’ especially if it know that you possess other resources, including — but not limited to — home equity, a pension plan, or an RRSP?

The Potential of “Fairness Applications”

There is one process which might bear some limited fruit, while also — conceivably — reducing the costs spent on a tax professional. The CRA’s Fairness Program permits for the negotiation of interest and penalties. First, though, the taxpayer must prove that it qualifies under program provisions. Let’s go down that road … right now.

The Fairness Provisions of the Income Tax Act

The Fairness Provisions of the Income Tax Act (“ITA”) provide the CRA with significant ability to grant equitable relief to taxpayers in order to

(1) Cancel and waive penalties and interest;

(2) Accept late-filed, amended, or revoked income tax elections; or

(3) Issue income tax refunds beyond the normal three-year period to individuals and testamentary trusts.

Since 2004 revisions to the ITA, a fairness application must be made within ten (10) years of the end of the taxation year to which the relief relates.

In most cases, a fairness application comes before the CRA in the first scenario — requesting waiver of interest and penalties. The two most common bases underlying such applications involve either processing delays by CRA, or financial hardship of the taxpayer. Since reform provisions were passed in 2004, the occurring as a result of either (i) processing delays by the CRA; or (ii) the taxpayer’s financial hardship.

Let us review the most relevant provisions of the ITA as applies to fairness applications:

Subsection 220(3.1): This section permits the Minister to waive or cancel all or any part of a penalty or interest otherwise payable under the ITA by a taxpayer or a partnership. Please reference the CRA Information Circular 92-2, “Guidelines for the Cancellation and Waiver of Interest and Penalties.” As a rule of thumb, the Minister only grants relief where extraordinary circumstances beyond the taxpayer’s control gave rise to the penalty or interest. Such “extraordinary circumstances” include:

• Natural or human made disasters, such as a flood or fire;

• Civil disturbances or disruptions in services, such as a strike;

• Serious illness or accident, or serious emotional or mental distress, such as death in the immediate family;

• Erroneous information from the CRA in the form of incorrect written answers or errors in published information;

• Delays by the CRA in processing or providing necessary information;

• When collection has been suspended because of an inability to pay caused by the loss of employment and the taxpayer is experiencing financial hardship; or

• When a taxpayer is unable to conclude reasonable payment arrangements because the interest charges absorb a significant portion of the payments.

Subsection 220(3.2): This separate section permits any taxpayer or a partnership to apply to the Minister to make a late election, or to amend, or revoke a previous election. CRA Information Circular 92-1, “Guidelines for Accepting Late, Amended or Revoked Elections.” In order to obtain an extension of time for making an election, the taxpayer or the partnership must normally demonstrate that

(1) The failure to elect on time was inadvertent;

(2) The election would have been made on time if the taxpayer or the partnership had been aware of the election;

(3) The taxpayer relied on incorrect information received from the CRA; or

(4) The election was not filed on time due to the same types of extraordinary circumstances beyond the applicant’s control.

Please note, Information Circular 92-1 suggests that the taxpayer or the partnership must demonstrate that the original election would cause an unintended tax result.

If the CRA refuses to grant relief pursued under Subsection 220(3.1) and/or (3.2), the ITA provides for requesting a second level of CRA-sponsored review, and involving review by the Director of the relevant district office/tax center. If this second layer of review also fails to provide taxpayer relief, there remains the final option of judicial review in Federal Tax Court. Let’s take a quick moment to touch upon the dynamics of Federal Tax Court review.

Federal Tax Court review occurs whenever the taxpayer is able to claim that the CRA failed to exercise reasonable and fair discretion when denying relief. Please understand, the Court will not simply overturn the CRA’s decision. Rather, it will — if it makes such a finding of abuse of discretion, remand/send back the matter to CRA for reconsideration based upon the Court’s mandate/written decision.

Hopefully, the reader has been thoroughly educated through this ‘quick and dirty’ explanation of the process of attempting to have the CRA reduce the amount of tax liability exposure, and the process of filing a ‘fairness application.’ Again, if someone is reading this because they are directly impacted by such circumstances, the best option may be to consider consulting with and/or hiring a tax law professional.